NEW YORK (CNN/Money) -
Blockbuster Inc. announced Tuesday it is abolishing late fees on all its video tapes, DVDs and video games as of Jan. 1.

The world's largest video rental company will still have due dates for their rental products -- one week for games and two days or one week for movies, depending on whether it's a new release.

But customers will be given a one-week grace period after that to return the product. After that grace period ends, the chain will automatically sell them the product, less the rental fee. If the customers don't want to purchase the movie or game, they can return the product within 30 days for a credit, less a restocking fee.

Blockbuster (Research) has been competing with the growth of by-mail rental services, such as Netflix (Research), which allow customers to keep movies as long as they want in return for a monthly fee. In August, Blockbuster started offering that kind of monthly rental service itself. It said Tuesday that service will continue in addition to this new individual rental policy.

"For the past year, the company has been testing a variety of rental options in markets across the U.S.," it said in its statement. "In no-late-fees test markets, the increased rental transactions and retail sales offset the lower level of revenues resulting from eliminating late fees."

It estimated that late fees would have contributed about $250 million to $300 million to revenue next year.

The company said it also plans to lower its ongoing marketing, operating and promotional costs after implementing the change.

The company said as a result of the move it expects operating income in 2005 to be flat compared with 2004 results after an estimated $50 million it will spend to market and implement the change to a no late fee system.

Analysts surveyed by earnings tracker First Call had forecast that the company would earn 73 cents a share in 2004 and 67 cents a share in 2005. That works out to about a $6.5 million drop in forecasted earnings between the two years.

In a U.S. regulatory filing, the ever-active financier said he believes he is the largest shareholder of both Hollywood and Blockbuster and that he contacted the chief executives of both companies to press for a merger.

Hollywood Entertainment has entered into a merger agreement with buyout firm Leonard Green & Partners as well as Hollywood's top management to take the company private.

Blockbuster is offering $11.50 a share for Hollywood, or about $700 million, and it has said it would be willing to raise its bid subject to a review of company financial information.

Leonard Green and Partners is offering $10.25 a share for the company. Movie Gallery (Research), the No. 3 video rental chain, is also involved in the bidding.